These Stocks Are Sitting on Mountains of Cash
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Finding a company that is both profitable and in strong financial position is no easy task. At the same time, investing in stocks that have the margin of safety of a strong balance sheet should be a priority in a time of economic uncertainty.
Over the last few years, profits have continued to roll in to corporate coffers. At the same time, the employment market has remained frustratingly slow to recover since the financial crisis ended. So what are companies doing with all their cash? In many cases, nothing. They're certainly not hiring or spending on capital expenditures that are non-essential.
That spells opportunity for investors. There are now stocks that have balance sheets bloated with cash. Here are three stocks that are immensely profitable and also help share owners sleep at night with extremely strong balance sheets.
Sitting on a gold mine
When you think of companies holding mountains of cash, a copper and gold miner might not immediately come to mind. However, that’s exactly what Freeport McMoRan Copper & Gold (NYSE: FCX) has to offer.
Freeport has been in free-fall over the past several months. Freeport traded as high as $42 per share as recently as October 2012. That means that in eight months, the stock has lost 35% of its value over that time. Looking further back, the chart is even uglier: Freeport traded above $60 per share at the beginning of 2011.
This fall has occurred despite the fact that Freeport is in great financial shape. Freeport held more than $9.5 billion in cash and equivalents on its books, amounting to 35% of its entire market capitalization.
Moreover, Freeport’s current ratio stands at 5 times, meaning the company has $5 in current assets for every $1 in current liabilities.
Two technology titans with loads of cash
Typically, technology stocks in particular are known for having lots of cash on the books. Technology firms usually don’t have a lot of long-lived assets, so there’s little need to keep long-term assets. As a result, many large technology firms have seen the cash pile up in recent years.
One of them is Microsoft (NASDAQ: MSFT), the software king. The $285 billion company by market value held nearly $75 billion in cash, cash equivalents, and short-term investments on its books. That figure equates to 26% of the stock’s market capitalization.
To illustrate Microsoft’s financial position, consider that the company is one of only four to hold a triple-A credit rating from Standard and Poor’s.
Microsoft isn’t alone when it comes to technology giants holding piles of cash. Competitor Apple (NASDAQ: AAPL) has a mountain of cash on its balance sheet that, at first glance, is almost hard to believe.
Apple’s problems have been well-documented over the past several months. The stock has lost some $300 per share in value, as the company’s detractors consistently point to a lack of innovation in the post-Steve Jobs era.
While all of this has been going on, Apple’s cash pile continues to grow. As of the most recent quarter, Apple holds $145 billion in cash, equivalents, and short and long-term securities on its books, representing 37% of its market capitalization. Apple’s cash mountain grew by more than $20 billion just from the fourth quarter of 2012 to the first quarter of 2013.
Future cash flow provides a further cushion
Piles of cash of this magnitude are only possible because these companies generate big profits with relatively little capital expenditures. Freeport racked up more than $18 billion in 2012 sales, and due to a falling share price, now trades for only 9 times trailing earnings.
Consider that the S&P 500 Index trades for a trailing P/E multiple in the mid-teens, and you can see the value proposition presented by a cheap stock with a compelling dividend and billions in the bank.
Meanwhile, Apple and Microsoft rule the technology landscape. Apple racked up more than $43 billion in sales in its most recent quarter alone. Microsoft, for its part, generated nearly $21 billion in sales last quarter.
Both Apple and Microsoft, like Freeport, trade for meaningful discounts to the broader market. Each stock trades for less than 11 times forward earnings.
Furthermore, instead of allocating their spare cash to hiring more employees or expanding their businesses, these companies have instead decided to use their cash hoards to pay compelling dividends. Each of these stocks pays a dividend that beats the yield on the broader market. Microsoft and Apple yield nearly 3% at recent prices, while Freeport McMoRan yields 4.5%.
Mountains of cash mean margins of safety
These stocks all have three key qualities in common: steady profits, strong dividend yields, and massive amounts of cash on the balance sheet. These companies provide their shareholders with the margin of safety of having at least 25% of their market values in cash on the books. That will surely help limit downside risk, even in today’s volatile market environment.
As a result, if you’re looking for companies with sparkling clean balance sheets, that are sitting on piles of cash with manageable debt levels, this list is a great place to start.
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Robert Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Freeport-McMoRan Copper & Gold, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!